News in the mpc minutes - understanding markets

Economics news – news in the droppings - understanding market movements
This week it doesn’t get more exciting for economists. The first set of minutes of the MPC under the Mark Carney regime were released on Wednesday. Looking for nuggets of information, amidst the download. A bit like the scene in Jurassic Park when Dr Ellie Sattler is digging with her hands through a pile of dinosaur droppings. Nuggets of information, amidst the download! How did the new Governor vote on QE? How did the other members vote? What was the guidance on forward guidance? Would the ten page minutes be worth the ten thousand minute wait? They were! The death of QE was foretold!

“Regarding the Bank Rate and the stock of asset purchases, the Committee voted unanimously in favour of the proposition that base rates and Quantitative Easing (QE) should be kept on hold.” The MPC were united - Carney called time on QE.

The epoch of Quantitative Easing draws to a close. David Miles [MPC member] and Paul Tucker [Deputy Governor Responsible for Financial Stability] fell into line with the “new reality”. The pair had been the two QE stalwarts who had “stuck it out” with Mervyn King right to the end of the line. With the economy recovering and inflation rising, it was time to say goodbye to QE. Time for the MPC to wash it’s hands of the monetary experiment, just as Dr Sattler, post examination of the dung, washed her hands before tucking into dinner, we hope.

Now we enter the era of forward guidance and intermediate thresholds. The Governor is not ruling out a quantum of additional stimulus. He just needs time to think about the form it may take, plus guidance on the time frame and “triggers” for the new monetary policy framework. Can’t wait for the August deposit.

Monetary policy is a bit like genetic experimentation. We have tried M3, shadowing the Deutschmark [An old Germanic monetary medium] and QE. Time for a cautionary word from Jurassic Park’s Dr. Ian Malcolm [Jeff Goldblum],  “The kind of control you're attempting simply is... it's not possible. If there is one thing the history of evolution has taught us it's that life will not be contained. Life breaks free, it expands to new territories and crashes through barriers, painfully, maybe even dangerously, but, uh... well, there it is.”

And so it is with gilt yields, sooner or later the market will break out, back to equilibrium value, as the period of financial repression and life on Planet ZIRP draws to a close. For the moment, rejoice. QE is dead, it ran out of intellectual currency long ago.

In other news ...
The good news for the UK economy continued. In jobs data, the claimant count fell by 20,000 in the month to June, an unemployment rate of 4.4%. The wider unemployment rate fell 6,000 to 2.51 million in the three months to May, a rate of 7.8%.

Retail sales also presented a positive picture with volumes rising by 2.2% in June after 2.1% in May. On line sales continue to force the pace of change in the high street, with internet sales up by 18% in the month. In the first quarter of the year, retail sales were pretty flat but the second quarter (up 1.7%)  offers promise for the rest of the year.

Government borrowing figures were also released this week. Good news as the figures for last year were revised down by £2.1 billion to £116.5 billion last year. Not so good news as the borrowing figure for June was slightly higher than June last year. The net figure flattered by the transfer of almost £4 billion from the Bank of England Asset Purchase Facility. The old lady mugged again for gilt coupons under the Treasury - “Money for nothing, gilts for free” campaign.

Public sector debt was £1.2 trillion at the end of the month equivalent to 75% of GDP. For the year as a whole, the recovery, if maintained will positively impact on net borrowing. The tax take is rising but spending is resilient to austerity. Nevertheless, the Chancellor may be in a much stronger position by close of year.

Inflation, proved to be the real negative in the week. Inflation CPI increased to 2.9% in June from 2.7% in May. The Governor narrowly avoided having to write an explanatory letter to the Chancellor, explaining the missed target. Not to worry, the 2% target is off the agenda for now. We may not see the like in Mark Carney’s term in office. 2.5% by end of year will be challenge enough.

Producer prices suggested inflation pressures are rising but not intense. Output prices increased to 2% in June as input costs increased to 4.2%. Home food prices along with energy and oil prices to blame for the latter.

What happened to sterling?
Sterling recovered further this week closing at $1.5258 from $1.51 against the dollar and  up against the euro to 1.1608 from 1.1560. The Euro dollar closed relatively unchanged at 1.3411 and against the Yen, the dollar closed up 100.3 from 99.01.

Oil Price Brent Crude closed relatively unchanged at $108.1. The average price in July 2012 was $103 approximately.

Markets, were up - The Dow closed up 15,543 from 15,464. The FTSE closed at 6,630 from 6,545. Markets continue to rally. This is the time to average in, albeit slowly into August.

UK Ten year gilt yields closed at 2.29 from 2.33, US Treasury yields closed down at 2.48 from 2.59. The feral hogs back in the pen. Yields are set to move higher, the financially repressed will break free from their golden fetters.

Gold closed up at $1,292 from $1, 277. Bernanke admitted this week, he didn’t understand gold? I think he was referring to the movements, our theme of the week.

That’s all for this week.

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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist.

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